Banking Overhaul Sounds Cry: Let The Games Begin

For at least two decades, bankers, insurance purveyors and stockbrokers have been lobbying for what they call a level playing field.

Now, it seems they will get it. You may well wonder what games they will play on that field.

In an uncharacteristic move that would appear to choke off a perennial source of campaign contributions from competing special-interest groups, congressional negotiators agreed early Friday to resolve the long-standing debate about liberalizing Depression-era banking laws.

In recent years, regulators had done much of the heavy lifting on this issue by authorizing numerous end runs around laws that prohibited banks from underwriting securities and insurance. The Glass-Steagall Act of 1933 arose from chilling evidence that bankers were betting the safety of depositors' money on corrupt stock speculations in the 1920s.

But pressure from more liberal financial-service structures in Europe and Japan in recent years plus the force of conventional economic doctrine pushed the legislative solution forward.

Here's a typical industry reaction to Friday's agreement, expressed by Hjalma Johnson, president of the American Bankers Association:

"The legislation that Congress is about to vote on will give consumers one-stop-shopping for their financial services. By letting banks, insurance companies and securities companies compete in each other's traditional businesses, the legislation will give consumers more choice and convenience and lower prices."

The gaping incongruity between the first sentence and the second apparently disturbs no one in the banking business. How will banks compete with insurance companies if banks and insurance companies merge into one-stop conglomerates?

The long-term benefits of financial industry consolidation are mostly theoretical for ordinary consumers and even some shareholders. Certainly, the stalwart owners of the former First Chicago Corp. have enjoyed no benefit from the merger of that institution into NBD Corp., formerly of Detroit and, more recently, Banc One, formerly of Columbus, Ohio.

Reports mount that banking behemoths have been more adept at imposing new and higher consumer fees than in passing on advertised economies of scale.

As for the implicit responsibility of bankers to serve their communities, the results are mixed, says Malcolm Bush, president of the Woodstock Institute, a Chicago-based housing advocacy group.

The Community Reinvestment Act, which requires banking firms to demonstrate appropriate service to their immediate communities when they seek government approval for mergers and other extensions of their powers, apparently has been expanded to cover the new powers granted by the legislation.

But Sen. Phil Gramm, the Texas Republican and Senate Finance Committee chairman whose doctrinaire animus toward the CRA angers even bankers who live under it, apparently won a provision reducing the number of CRA inspections that will be conducted at small banks achieving satisfactory CRA scores.

"Gramm's argument is that (the CRA) interferes with the market. Our argument is that it helps banks find new markets," Bush said. He pointed to what he called a successful community service agreement reached last year in connection with Banc One's acquisition of First Chicago NBD. The agreement includes the expansion of low-balance personal accounts in low-income areas and equity investments in Chicago neighborhoods.

"Small banks in low-income areas and rural communities can be the only bank in town," he said. "To take CRA pressure off them will reduce their CRA performance."

In addition, the agreement apparently authorizes so-called wholesale financial institutions, set up by insurance and securities firms, which would be able to accept large, uninsured deposits from wealthy customers and would be exempt from CRA obligations.

The provision for wholesale financial institutions--off-shore banking without going off-shore--sounds like a time bomb in the bill that will explode in all sorts of unintended consequences.

Satisfying competing interests is the essence of the legislative process, but ordinary consumers don't seem to have many baubles on this Christmas tree.